Reference no: EM13599566
Gorgeous Georgie Pty Ltd (Georgie) is a private company with many strategic investments. The finance director is concerned that he might be required to consolidate some of these investments in accordance with AASB 127. Details of the investment relationships are as follows:
(a) Georgie has a 25 percent interest in the share capital of LBX Pty Ltd (LBX) which is a company involved in the same industry as Georgie. The remaining 75 percent of the share capital is owned by LBX's founders Mr and Mrs T. Mr and Mrs T are unfamiliar with the industry and so have given Georgie three out of the five seats available on the board of directors. Georgie takes the lead on all decisions but the business is closely monitored by Mr and Mrs T who hold the other two board positions.
(b) Georgie has a substantial loan receivable from BBT Pty Ltd (BBT) but owns no shares in it. BBT, as a result of the current economic climate has experienced significant trading problems. BBT has failed to make its regular payments under the loan agreement. Georgie has become concerned about the recoverability of the loan and has reached an agreement with the management of BBT that Georgie's executives will take control of the company's finances for a period of five years. An executive of Georgie has been given control of BBT's cheque book and makes all payments. Georgie has not gained any seats on BBT's board of directors, which is still dominated by BBT's share holders.
(c) Georgie owns 50 percent of Aqua Pty Ltd (Aqua) with the other 50 percent being owned by Blue Pty Ltd (Blue). Both companies have equal voting rights and an equal share of seats on the board of directors. Under an agreement with Blue, Georgie supplies finance to the company on normal commercial terms. The loan is fully secured against the assets of the company. Blue provides the management and entrepreneurial flair to Aqua. Under the agreement Blue will receive a management fee tied to the net profits of Aqua after allowing for interest payments on the loan from Georgie. In times of no profits the interest payments will still be met but Blue will not receive any remuneration.
(d) Georgie operates as the trustee company for the Georgie Trading Trust. The Trust is a discretionary trust with the nominated beneficiaries being the directors of Georgie. These directors are Mr M, Mrs A and Mr J. Over the years the Trust has distributed its income in the following proportions: Mr M 70, Mrs A 20, Mr J 10. Under the terms of the Trust Deed Georgie has complete control over the operating and financing decisions of the Trust.
(e) Georgie holds a 75 percent interest in JIB Pty Ltd (JIB). The interest was created when Georgie converted a substantial loan it made to JIB into equity at the invitation of JIB when JIB began to trade poorly and recovery of the loan seemed uncertain. JIB has a large deficiency in net assets and has been consolidated for many years. Georgie is a passive investor, having no seats on the board of directors and no say in the financing or operating decisions of JIB.
Required: Advise Georgie's finance director of AASB 127's requirements with respect to control. For each of the above investments indicate where the control rests and whether or not consolidation is required. Give reasons for each piece of advice